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Refinancing a mortgage means one thing - a new loan. There are many areas you need to consider before taking a refinancing option. If you are not careful, you could wind up paying far more than your current loan, or even risk losing your house. Some of the factors that need considering include:

Penalties - will you have to pay any penalty fees for paying out your current mortgage early. There are some financial institutions who will still charge a penalty fee even though you are refinancing through the same institution.

House Prices - if your house price has fallen during the current economic crisis then your bargaining power will be greatly reduced. Generally speaking, the higher the percentage of a deposit, the more secure your loan is. Secure loans can attract lower interest rates. Loans with less security attract higher interest rates. You may be better off waiting for house prices to return to previous levels before refinancing. This will give you a higher equity level which in turn gives you more bargaining power.

Length of Loan - if you only have 10-15 years left to pay on your loan, refinancing with a 20-25 year loan is putting you back to square one when it comes to eventual ownership. Whilst lower payments may be attractive, because you are paying over a longer period, the amount of interest you are going to pay will be considerably higher. Sometimes the short term gain does lead to a long term gain.

Economic Climate - the current economic climate is such that lenders are putting very strict guidelines down for lending. You need to be able to demonstrate a good credit history, proof of stable income (with emphasis on stable) and a strong portfolio of assets. The more you can bring to the negotiating table, the better your chances of a good refinancing loan.

There are steps you can undertake that may help you before looking at a refinancing option. You could submit your loan to a 'loan audit'. This is where a professional auditor goes over your current loan very closely looking to see if your lender has breached any areas of the various lending acts.

If your lender has committed a breach, you may be in a position to not only negotiate a much better loan, you may be entitled to a refund of some or all of the interest already paid on your current loan. If that is used as a payment on the current loan, the amount that needs refinancing could be reduced considerably.

Refinancing often sounds like a good idea in the short term. Repayments are lower and easier to manage, however the total cost in the long run is much higher and you are tied down for a longer period of time. Think carefully before refinancing.

Learn more about this author, Les Scammell.
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